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How much do Treasuries tell us about recessions?

Yield spreads and economic conditions

Can shifts in the Treasury yield spread predict economic downturns? A common belief is that widening spreads indicate stable economic conditions for the near future—as reflected by market expectations about future interest rates and inflation. On the other hand, narrowing spreads (including negative spreads) may signal worsening conditions. Data in FRED can shed some light on how well this concept has held up in the past two decades.

The graph above shows that yield spreads between the 10- and 2-year notes fell to a low of -0.41 percentage points in April 2000: This was in line with the worsening economic conditions and the recession from March to November 2001. In November 2006, yield spreads between these notes dropped down again to a valley of -0.15 percentage points. And, again, this development was followed by the 2007-2008 global financial crisis. So, it seems the theory that recessions follow negative yield spreads does happen to match the economic data. Despite this recent pattern in U.S. Treasury bill spreads, though, we cannot confidently assert that negative spreads predict recessions. To classify spreads as strong indicators, we’d need much larger datasets—including longer periods and other economies. So, the examination of bond yield spreads continues…

How this graph was created: Search for “10-Year Treasury Constant Maturity Minus 2-Year”; select “line” as the format and “monthly” as the frequency. Set the starting date as “1997-05-01” and the ending date as “2017-05-01.”

Suggested by Wei (Wilson) Wang.

View on FRED, series used in this post: T10Y2YM

The prices of caffeine and education

Which is more jittery?

As many students prepare to face the costs of education, they find themselves wondering what, if any, nonessential items they’ll be able to afford with the added burden of paying for their schooling. Whether hot beverages, especially coffee, are “nonessential” to students remains debatable, yet their price changes relative to price changes in education is a concept worth exploring.

We use two data series found in FRED to construct the price ratio of caffeine to education: the Harmonized Index of Consumer Prices for Coffee, Tea, and Cocoa and the Harmonized Index of Consumer Prices for education. The graph shows this ratio over the past 13 years for the EU as a whole, the EU nations with the highest and lowest GDP in 2016—Germany and Malta—and those with the highest and lowest GDP per capita in 2016—Luxembourg and Bulgaria, respectively. The Harmonized Index of Consumer Prices is an inflation indicator that measures the changes in price of the goods it describes. By creating a ratio of HICP for hot drinks to HICP for education, we can examine how much the price of the former changes in comparison with price of the latter. The data are indexed using 2015 as the base year, explaining the convergence of the trend lines over time until they are all equal in 2015.

As expected, the EU indicator appears to fall near the mean of the four nations, except for the period from April 2011 to September 2012, when the ratio of HICP for hot drinks to education was highest in the EU as a whole (which had 27 countries at the time). In the two relatively better-off countries, Luxembourg and Germany, the ratio of the HICP for hot drinks to education generally remains lower than the others, meaning that the relative price of education has been increasing (as the index year is toward the end of the period) while in poorer countries the decrease in price of hot drinks is comparatively greater when compared with that of education. Note also the sudden drop for the ratio in Germany in April 2007. According to the IMF, several German states introduced new educational fees during that time period. The sudden rise in the price of education increased the HICP for education, thus causing the indicator we constructed to fall.

We can also examine the two indices separately across the five regions. While the HICP for hot drinks (above) remains similar for the EU and the four countries being investigated, the HICP for education (below) varies far more drastically, with Germany and Luxembourg seeing lower inflation for education and Malta and Bulgaria experiencing the opposite. Thus, we can attribute the differences in the ratio of HICP for hot drinks to education more to variability in education than in coffee, tea, and cocoa.

Education costs differ among nations likely because education is a good that is very specific to the country in question and its education policies. The prices of consumer goods such as coffee, tea, and cocoa are dictated by factors that span the international market, like input availability and technology. Thus, the inflation of the prices of foods and beverages is more homogeneous within the European Union, while that of education includes a higher degree of variability between nations.

How these graphs were created: Graph 1: Search for “HICP coffee EU,” select the relevant series, then click on “Add to Graph.” Under “Edit Line 1” and “Customize Data,” search for “HICP education EU” and click “Add.” In the formula box, type “a/b” and click “Apply.” Add a line and repeat the process for Germany, then Malta in Line 3, Luxembourg in Line 4, and Bulgaria in Line 5.
Graph 2: Search for “HICP coffee EU,” select the relevant series, then click on “Add to Graph.” Add a line and repeat the process for Germany, then Malta, Luxembourg, and Bulgaria. Graph 3: Follow the same process as for Graph 2, using “HICP education” as the search term.

Suggested by Maria Hyrc.

View on FRED, series used in this post: CP0121BGM086NEST, CP0121DEM086NEST, CP0121EU28M086NEST, CP0121LUM086NEST, CP0121MTM086NEST, CP1000BGM086NEST, CP1000DEM086NEST, CP1000EU28M086NEST, CP1000LUM086NEST, CP1000MTM086NEST

The rise (and fall?) of the cost of education

Education inflation appears to be converging with general inflation, at least for now

For many years, the cost of education has risen steadily and significantly more than the general level of prices. This trend has led to numerous complaints that education is out of reach; it has also led to a boom in student loans. The graph clearly shows how education inflation (blue line) has been above general inflation (red line) every year since 1994. And, again, quite significantly so. The past few observations, however, exhibit a marked reversal, with one observation even showing CPI inflation higher than education inflation. Does this mean education will become relatively more affordable now? It’s difficult to say from current data, especially since there have been two other episodes, in 2008 and 2011, when the two series converged only to diverge again. Time will tell if this latest development is pomp or circumstance.

How this graph was created: Search for “CPI Education” and create the graph. From the “Edit Graph” section, under “the Add a Line” option, search for and select CPI. Choose units “Percent Change from Year Ago” and click on “Copy to All.”

Suggested by Christian Zimmermann.

View on FRED, series used in this post: CPIAUCSL, CUUR0000SAE1

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